This commentary will focus on key technical characteristics that our Canterbury team focuses on. It will be chart-intensive, featuring several visual aids. We'll cover general market insights and then explore stocks with 'big bases.’
Market Comment- Unusual Volatility
Before we dive into technical analysis, let’s briefly discuss the markets. Recently, the S&P 500 experienced unusual volatility: a -4% decline followed by a 4% rise in consecutive weeks. Since 1950, this pattern (consecutive weekly moves of 4% in opposite directions) has occurred only 35 times. Such fluctuations typically coincide with highly volatile markets. The most recent prior instance was in June 2022. Prior to that were a few occurrences during the 2020 COVID-19 market scare. Notably, almost a third of these events happened during the 2008 Financial Crisis. In other words, this level of week-to-week volatility is uncharacteristic of a an efficient bull market, which typically has stable or declining volatility.
While volatility in the markets has increased, the increase has mostly come from one area: technology. Technology constitutes the largest portion of the S&P 500’s market capitalization. If technology stocks become more volatile, which they have, then the index will likely also be more volatile.
Outside of the large technology stocks, we are seeing stocks that have strong technical foundations. A few sectors have recently broken to new highs. The rest of this commentary will focus on one way to identify stocks with positive technical characteristics.
Technical Analysis
Let's shift our focus to chart patterns that our Canterbury team finds particularly promising. Despite recent volatility in technology stocks, the broader market reveals several securities with positive technical indicators. We'll now explore one key technical pattern we consistently look for in our analysis. We will then show some examples of this pattern.
In our 'Chart of the Week' portion of market commentaries, we often highlight stocks breaking out of a 'big base' with rising MoneyFlow. Let's define these key terms:
1. Base: A price level where supply and demand shift. We will focus on areas of overhead supply - price points where a security tends to sell off. A repeated selloff at these price points creates a line or area of resistance. As the stock sheds old owners and has newer buyers, it eventually breaks out of this base. In technical analysis, there's a saying: "The bigger the base, the higher in space."
2. MoneyFlow Index: Often called the 'smart money indicator', this volume-based metric confirms price movements. Ideally, we want to see stocks rise on heavy volume and retreat on low volume. The MoneyFlow Index combines volume with a security's intraday trading pattern. As we will show in charts, rising MoneyFlow can increase the likelihood of a breakout.
Combining the 'big base' and MoneyFlow indicators helps us identify stocks with a higher probability of breaking out. While past performance doesn't guarantee future results, recognizing these positive technical patterns can reveal securities with characteristics conducive to potential upward movement. These indicators serve as valuable tools in our technical analysis toolkit.
Now, let’s show some visual examples.
T-Mobile Example (TMUS)*
Let's examine T-Mobile (TMUS), a stock we've held in our adaptive portfolio model since May. This example illustrates a shorter-term base and break out. The chart is divided into two views, with the left side showing T-Mobile run up substantially after a breakout. The right side of the chart highlights the technical pattern that occurred prior to the stock running up.
Right side (January to May, before breaking out):
1. TMUS moved in a sideways pattern, establishing clear upper resistance and lower support levels.
2. During this period, MoneyFlow was rising, despite the stock's sideways price movement.
3. Eventually, TMUS broke through its upper resistance (the upper base) coinciding with a new high in MoneyFlow.
Blackstone Inc (BX)*
Blackstone Inc is a financial stock which shows a similar, more recent chart pattern. We have held this security since July.
1. From December to May, Blackston Inc stock established an area of upper resistance and lower support, moving in a sideways trading range.
2. The stock had rising MoneyFlow, meaning that volume was stronger to the buy side of the security.
3. After breaking out of overhead resistance, it is very common for a security to retreat to around the level where it broke out. The idea is that the prior base of resistance should become a base of support. After retreating, BX bounced off the area of resistance (establishing support) and moved higher, setting a new all-time price high.
Coca-Cola (KO)*
Coca-Cola (KO) provides another example of the 'big base' and strong MoneyFlow pattern, but over a longer timeframe. This stock, also part of our adaptive portfolio model, demonstrates the pattern as follows:
1. Base Formation (since 2022):
o KO repeatedly reached similar peak levels, failing to break higher and selling off each time.
o Over time, the stock established slightly lower peaks, forming a resistance level.
2. MoneyFlow Divergence:
o Despite lower price peaks, MoneyFlow was setting new highs.
o This indicated that rallies to each peak were occurring on progressively stronger volume.
3. Breakout:
o After testing the resistance level multiple times, KO finally broke out.
o The stock rallied to a new high, supported by strong MoneyFlow.
Gold (GLDM)*
It is important to note that these technical characteristics can also be applied to ETFs, such as sectors, styles, countries, and even gold. At the beginning of 2024, Gold broke out to a new all-time high after building a base dating back to 2021 (illustrated below using GLDM). We have hold this in our adaptive portfolio model.
Recent Developments
Each of the charts above illustrate examples of securities that built bases, had strong MoneyFlow, and broke out to new highs. Now that we have established an ideal technical pattern and supported it with examples, what other stocks are now showing the characteristics of breaking out of a big base?
Paychex Inc (PAYX) & Thermo Fisher Scientific Inc (TMO)
Below are charts for Paychex (PAYX) and Thermo Fisher Scientific (TMO), both exhibiting promising technical patterns:
1. Multi-year base build: Both stocks are on the verge of breaking out from bases formed over several years.
2. Rising MoneyFlow: Indicating strong buying pressure and potential for upward movement.
3. Higher lows: Suggesting an overall upward trend in price action.
The critical question now is: Will these stocks successfully break out and maintain their new levels?
*All charts created by Canterbury Investment Management using Optuma Technical Analysis Software
Bottom Line
While past performance doesn't predict future results, we can employ a systematic process to identify stocks with characteristics conducive to potential growth. However, it's crucial to understand that even stocks with ideal technical patterns don't always perform as expected.
A disciplined, adaptive investment approach involves:
1. Identifying when to buy securities based on technical indicators like 'big bases', strong MoneyFlow, and relative strength.
2. Equally important, knowing when to sell positions that no longer exhibit favorable characteristics.
Many investors tend to hold onto underperforming securities for too long. A more effective strategy often involves reallocating capital from these positions to securities displaying more promising technical patterns.
Keep in mind that security selection and management is just one component of adaptive portfolio management. The more critical aspects are asset allocation and diversification.
Investors need a process to not only know what to buy or when to buy it, but how to allocate the portfolio. There are periods when owning a portfolio of only stock securities can be beneficial, but also periods where it is critical to significantly reduce a portfolio’s volatility through holding noncorrelated or even negatively correlated assets. We employ a dynamic process to adjust our portfolio allocations in real-time, responding to ever-changing market environments. This adaptive approach allows us to navigate market volatility in any market environment- bull or bear.
Disclaimer:
The information provided in this commentary, including all charts and analysis, is for educational and illustrative purposes only. It should not be considered as investment advice or a recommendation to buy or sell any particular security. The stocks mentioned (T-Mobile, Blackstone Inc, Coca-Cola, Paychex, Thermo Fisher Scientific, and others) are used as examples to illustrate technical analysis concepts and do not constitute investment recommendations.
Past performance is not indicative of future results. The technical patterns and indicators discussed, such as 'big bases' and MoneyFlow, do not guarantee future performance or successful investment outcomes.
Charts and data are believed to be accurate but cannot be guaranteed. Market conditions can change rapidly, and the relevance of any technical analysis may quickly become outdated.
Investors should conduct their own research, consider their individual financial situation and risk tolerance, and consult with a qualified financial advisor before making any investment decisions. Investing in securities involves risk of loss that investors should be prepared to bear.